Just because a company isn’t making money doesn’t mean the stock will go down. For example, although Amazon.com posted losses for many years after it listed, if you had bought and held the stock since 1999, you would have made a fortune. But while history boasts of these rare successes, those who fail are often forgotten; who remembers Pets.com?
So the natural question for MediciNova (NASDAQ:MNOV) shareholders is whether they should be concerned about its cash burn rate. In this report, we will consider the company’s negative annual free cash flow, which we will now refer to as “cash burn”. We will start by comparing its cash consumption with its cash reserves in order to calculate its cash trail.
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When might MediciNova run out of money?
A cash trail is defined as the length of time it would take a business to run out of cash if it continued to spend at its current rate of cash consumption. When MediciNova last published its balance sheet in June 2022, it had no debt and cash worth $65 million. Looking at last year, the company burned 13 million US dollars. This means it had a cash trail of around 5.1 years in June 2022. Notably, however, analysts believe that MediciNova will break even (at a free cash flow level) before then. If that happens, then the length of his cash trail today would become a moot point. Below you can see how its liquidity has changed over time.
How is MediciNova’s cash burn changing over time?
While it’s good to see that MediciNova has already started generating operating revenue, last year it only produced US$38,000, so we don’t think it’s generating significant revenue at this stage. Therefore, we believe it is a little early to focus on revenue growth, so we will limit ourselves to looking at how cash burn has evolved over time. Over the past year, its cash burn has actually increased by 49%, suggesting that management is increasing its investments in future growth, but not too quickly. However, the company’s true cash trail will therefore be shorter than suggested above, if expenses continue to rise. Obviously, however, the crucial factor is whether the company will expand its business in the future. For this reason, it makes a lot of sense to take a look at our analysts’ forecasts for the company.
How easily can MediciNova raise funds?
Given its cash burn trajectory, MediciNova shareholders may want to consider how easily it could raise more cash, despite its strong cash trail. Issuing new shares or going into debt are the most common ways for a listed company to raise more funds for its business. Typically, a company will sell new stock on its own to raise cash and drive growth. By comparing a company’s annual cash burn to its total market capitalization, we can roughly estimate how many shares it would need to issue to keep the company running for another year (at the same burn rate).
Given that it has a market capitalization of US$99 million, MediciNova’s cash burn of US$13 million equates to approximately 13% of its market value. As a result, we risk the company being able to raise more cash for growth without too much trouble, but at the cost of some dilution.
How risky is MediciNova’s cash burn situation?
As you can probably tell by now, we’re not too worried about MediciNova’s cash burn. In particular, we think its cash trail stands out as proof that the company is on top of spending. While its growing cash burn gives us reason to pause, the other metrics we’ve discussed in this article paint an overall positive picture. A real bright spot is that analysts expect the company to break even. Based on the factors mentioned in this article, we think its cash burn situation warrants some attention from shareholders, but we don’t think they should be concerned. Separately, we looked at different risks affecting the business and identified 3 warning signs for MediciNova (1 of which can’t be ignored!) that you should know about.
Sure MediciNova may not be the best stock to buy. So you might want to see this free collection of companies offering a high return on equity, or this list of stocks that insiders buy.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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